Trend shows companies replacing raises with bonuses

The recent stock market rumpus has been set off in part by fears that a tight labor market and quickening wage growth are a foretaste of higher inflation and interest rates. But sustained raises for American workers may be possible only if employers can break a habit: handing out one-time bonuses in place of salary increases.

A growing preference among employers for one-time awards instead of raises that keep building over time has been quietly transforming the employment landscape for two decades. But it was accelerated by the recession’s intensity, which made employers especially cautious about increasing labor costs.

The stream of companies announcing bonuses for their employees in the wake of the newly minted tax cuts is just the latest expression of the trend.

This little-noticed shift in how employers compensate workers could also help explain one of the economy’s most persistent puzzles: why a hot labor market has failed to ignite bigger increases in wages.

There has been “a continuing dramatic shift in the mix of compensation,” Aon Hewitt, the human resources consulting firm, noted last summer in its latest annual survey of company pay practices.

In 1991, for example, spending on temporary rewards and bonuses for salaried employees, known as variable pay, accounted for an average of 3.1 percent of total compensation budgets, while salary increases amounted to 5 percent.

The Envelope, Please

Since the late 1980s, an increasing share of companies’ payrolls has gone toward one-time bonuses and awards, while the share devoted to salary increases has fallen, according to data collected by Aon Hewitt, a human resources consulting firm.

In 2017, one-time payments consumed 12.7 percent to those budgets; raises amounted to just 2.9 percent.

“Pressure to increase productivity and minimize costs,” the report concluded, had pushed employers to forgo raises and rely more on short-term awards “as the primary means of rewarding for performance.”

Ordinarily, the jobless rate and wage growth are like two ends of a seesaw: When one drops, the other is supposed to rise. But that link seems broken, and like film-noir detectives, analysts have scrutinized hard-edge statistics and fuzzier psychological indicators for clues about why.

In the recession that began a decade ago, the businesses most likely to survive tended to be the most conservative spenders, said Douglas G. Duncan, the chief economist at Fannie Mae. That approach was rewarded and has now been reinforced, he said, helping to restrain the growth of full-time work forces and salaries.

Aon Hewitt’s annual surveys seem to bear that out. The practice of spending more on variable pay than on permanent raises took root in the 1990s, when growing competition from abroad increased pressure on companies to keep a lid on prices and production costs.

Pay-for-performance and other bonuses increasingly functioned as a release valve. Companies could offer more money to attract talent or when profits were strong, and pull back when business was slow.

After the recession, the trend accelerated.

“The response in 2009 was unlike any prior response to a recession or depression in that organizations actually reduced salaries, they didn’t just freeze them as a means of allegedly avoiding greater layoffs,” said Ken Abosch, a partner at Aon Hewitt. “I think there’s been a lesson learned from that.” That lesson: Stay nimble.

The recessionary hangover encouraged employers to avoid adding fixed costs and to be as flexible as possible in staffing and compensation. The trend toward outsourcing work that was once handled in house as a way of saving money fits in with that story line.

The percentage spent on salary increases never returned to its pre-2009 levels, the Aon Hewitt surveys show, while the percentage spent on bonuses and other short-term rewards climbed to new levels. “I don’t believe we’ll see a long-term increase in real wage growth,” Mr. Abosch said.

So far, Wall Street has drawn a different conclusion, although several economists question whether the 2.9 percent jump in hourly average earnings in January from a year earlier signaled a turning point. Paul Ashworth, chief North American economist at Capital Economics, attributed wage pickup last month to unusually cold weather, which reduced the number of hours that low-wage workers clocked.

The reasons for sluggish wage growth, of course, are a complex weave. Declining unionization, noncompete contracts, tepid minimum-wage increases, globalization and sluggish productivity have all played a role.

Whatever the cause, the consequences can be profound. Salary increases compound over time, offering greater financial security. Moreover, bonuses have not made up for wage stagnation. The inflation-adjusted median income of men working full time was lower in 2016 than it was in 1973. And their lifetime earnings — which include salary, wages, bonuses and exercised stock options — have mostly dropped since then.

Most bonuses still come in traditional forms: payoffs for executive-suite occupants and deal hunters, or sweeteners for newly hired employees. Certain industries, like finance and insurance, with their longer tradition of year-end and performance-based rewards, continue to have much bigger bonus budgets than sectors like retail.

But the practice has expanded. In 1991, fewer than half of companies that Aon Hewitt surveyed had a broad-based rewards program. Last year, 88 percent did.

“It’s now widespread across all industry sectors, even some that were holdbacks such as utilities, health care, not-for-profits and government,” Mr. Abosch said.

Salaried workers, rather than hourly wage earners, remain much more likely to be the recipients of such extra payments.

In tracking compensation, the Bureau of Labor Statistics does not differentiate between hourly workers and those on a set salary. Still, Jesus Ranon, supervisory labor economist at the bureau, said, “You can see in terms of percent of compensation there is an increase in these bonus components.”

In March 2004, bonuses accounted for 1.6 percent of total compensation (including wages, salaries and benefits). In March 2017, they accounted for 2.6 percent. The wage and salary share of total compensation budgets fell by nearly 2 percent over the same period.

If given a choice, most workers would take a raise. When Aon Hewitt asked 2,079 American workers in a second, newly completed survey what they would like to see their employers do with their tax-cut windfall, 65 percent chose a pay raise — twice as many as any other option, including a bonus or a 401(k) contribution.

Takisha Gower, a passenger service agent for Envoy, the air carrier that was previously known as American Eagle and is owned by American Airlines, welcomed her recent $1,000 bonus, which the company credited to the “new tax structure.” She is much more concerned, however, about her base pay week to week, a subject of longstanding contract negotiations.

“It was appreciated, but it doesn’t fix the long term,” Ms. Gower said of the bonus. “We need a livable wage that we can support our families off.”

“A lot of employees qualify for government assistance,” she added. “Some have to work 60 hours a week to make ends meet.”